Confidence takes biggest hit in 2 years

Problems in mortgage, housing and stock markets have American consumers less confident about economy.

By Chris Isidore, CNNMoney.com senior writer

August 28 2007: 5:03 PM EDT

NEW YORK (CNNMoney.com) -- Turmoil in the stock and housing markets caused the biggest drop in consumer confidence in almost two years in August, according to a closely watched survey released Tuesday.

The Conference Board said its consumer confidence index fell to 105.0 in the latest survey of 5,000 households from a revised 111.9 reading in July.

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It was the biggest month-over-month drop since September 2005, when hurricanes Katrina and Rita sent gas prices to then record levels. This time, the problem was a series of financial storms, as consumers focused on problems in subprime mortgages, and falling home and stock prices.

"A softening in business conditions and labor market conditions has curbed consumers' confidence this month," said Lynn Franco, director of the Conference Board's Consumer Research Center, which conducts the monthly survey of 5,000 households. "In addition, the volatility in financial markets and continued subprime housing woes may have played a role in dampening consumers' spirits."

The reading was also the lowest in a year, though it came in a shade better than the average forecast of 104.5 from economists surveyed by Briefing.com.

"Consumers have obviously been paying some attention to financial market troubles, and this appears to have weighed on their confidence," said Adam York, an economic analyst with Wachovia.

Franco said that the answers to various survey answers showed that confidence, while battered, hasn't vanished.

"Consumers still remain confident," she said. The latest reading is well above the post-Katrina reading of 86.6, the last time confidence saw this kind of shock.

"Current index levels suggest further economic growth in the months ahead," said Franco.

Those polled who said that business conditions are "good" decreased to 26.4 percent from 28.3 percent in July, while those saying conditions are "bad" increased to 16.3 percent from 14.5 percent. And those who described jobs as "hard to get" increased to 19.7 percent from 18.7 percent, while those who saw jobs as "plentiful" decreased to 27.5 percent from 30.0 percent in July.

But while those who expect business conditions to worsen in the next six months rose to 10.6 percent from 8.2 percent, that was still well below the 15 percent who believe business conditions will improve.

Consumers interest in buying a house actually ticked up slightly in the latest survey, with 3.5 percent saying they planned such a purchase in the next six months, up from 3.3 percent in July. But the percent who said they were uncertain about a home purchase gained by the same amount, up to 0.8 percent from 0.6 percent.

But their intention to buy other big-ticket items took a larger hit, as those intending to buy a car in the next six months fell to 6.1 percent from 7.3 percent in July, while those planning major appliance purchases dropped to 28.6 from 31.4 percent.

Earlier Tuesday, S&P/Case-Shiller Home Price Index showed housing values down 3.2 percent in the second quarter from a year earlier. The economists who completed the widely respected study said there is no sign that the slide will end soon.

In addition, the Dow Jones industrial average closed Monday off 5 percent from the record high close it hit in mid-July; a 10 percent drop typically reflects a market correction. Other major indexes are down about 6 percent over the same period. Partly on the weak confidence number and the latest housing reading, stocks were generally lower in early afternoon trading Tuesday, ahead of the release of minutes of the last meeting of the Federal Reserve.

But bonds rallied, trimming the yield on the 10-year note to about 4.54 percent in midday trading, on increased hopes that the drop in consumer confidence could help to spur the Federal Reserve to cut interest rates at its upcoming Sept. 18 meeting.